Up in smoke: How green policies are shaking up markets

The influence of climate-change policies on markets is nowhere more evident than it is in the energy sector where expectations of carbon emissions curbs by U.S. President Barack Obama, brought to fruition on Monday, have sent the Stowe Global Coal Index down 7.4% since the end of 2013 while the TSX/S&P Capped Energy Index is up 17.1% in the same timeframe.

A number of U.S. coal stocks were hammered on Tuesday following Mr. Obama’s announcement to cut power-plant carbon emissions 30% by 2030, underlining the heavy impact that stricter environmental policies being enacted by governments around the world can have on equity markets.

“We believe climate change is one of the major themes that will drive growth for companies across markets,” said Simon Webber, portfolio manager at Schroders PLC, a global asset manager based in London. “Whether it’s subsidies, taxes or firmer regulations, policymakers are having a major impact on how industries do business and while some companies get it and are positioning themselves in the right way, others do not.”

Such an investing strategy is not a call on the validity of climate change, which many dispute, but a recognition that some governments are moving ahead on green policies.

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This is true not only in the U.S., where Mr. Obama’s plan is a headwind for the country’s coal miners and a boon for its renewable energy companies, but in many other countries and economic regions around the world.

China, the world’s most populous nation, for example, is taking steps to address climate issues such as air pollution and water scarcity that will reduce the attractiveness of thermal coal as a fuel to meet power demand, and lead to increasingly competitive non-coal power sources taking a greater proportion of new power generation capacity.

“The resultant change in the policy landscape is likely to reduce the demand for and, in turn, the value of fossil fuel intensive assets,” said ClimateTracker, a London-based financial research firm specializing in climate-change policies.

Mr. Webber said valuations for energy stocks largely already reflect this view, noting Chinese coal stocks trade at a discounted price close to five or six times earnings while gas stocks there are at P/E multiples closer to 17 or 18 times earnings.

“The performance of coal stocks has been terrible,” he said “Is it any coincidence that public policy prefers gas and nuclear renewables? I don’t think it is.”

Perhaps less obvious is the impact that climate-change policies and broader environmental politics are having on other sectors of the stock market.

“For some sectors, like banks and pharmaceuticals, I’m not going to make the case that environmental policy is going to make much difference,” he said. “But in consumer and some industrial names, it has some really big impacts.”

One of the best examples of this is the auto sector, which for many years has focused its research and development on environmental technologies, such as electric hybrids and power trains that will meet the very strict regulations coming into play in five to 10 years.

Mr. Webber said the companies best-positioned for success are the ones that have invested heavily in these technologies — names like Toyota Motor Corp. and BMW AG ­— and those that supply the innovation such as BorgWarner Inc., a U.S.-based manufacturer of turbochargers and dual-clutch systems that help improve engine efficiencies in a cost-effective manner.

Auto industry players not focused in this direction, he added, will likely struggle, because “they won’t have the products that consumers want to buy or regulators want in the market.”

On the retailing front, meanwhile, Mr. Webber believes opportunities to play the climate-change game lie with the big online retailers such as Amazon.com Inc. and eBay Inc. that have a significantly smaller environmental footprint than do traditional bricks and mortar players.

“Online retailers have fewer energy requirements and more efficient distribution, so we think they have an advantage,” he said.

The impact of climate-change policies enacted around the world and in Canada is also affecting this country’s markets, particularly given the heavy concentration of resource stocks on the TSX.

“I do believe that 100 years from today, the energy complex will have transformed dramatically,” said Greg Newman, associate portfolio manager at The Newman Group, a division of Scotia McLeod in Toronto.

“Perhaps I am optimistic, but I believe that future technologies combined with the profit motive and an appropriate legislative balance over time, may one day evolve to cleaner and more efficient energy sources.”

That said, Mr. Newman is cautious about letting climate change dictate his investment decisions and he continues to buy companies — often regardless of their carbon imprint — that have good visibility of future earnings growth and are cheap relative to their peers.

“When heavier oil names, for example, have the right catalysts to reward investors, I’m a buyer. Equally, without visible earnings growth, even the most promising future clean energy company is still speculative.” he said. “While the backdrop of imminent change must be respected, you have to focus on what is more known.”

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